Real Estate 101: 6 Terms Every Buyer Should Know
Buying a house is an incredible achievement for previous homeowners and new homeowners alike. If you’re new to the world of real estate, everything can seem overwhelming and intimidating. However, once the transaction is finalized, the stress is quickly replaced with feelings of relief and accomplishment.
The path to closing however is filled with procedures that can get complicated quickly. Throw in a bunch of confusing, unknown real estate terms into the mix and you’re apt to feel like a deer in headlights. However, the real estate lexicon shouldn’t slow you down. In fact, to save you some time, confusion and a potential headache, we’ve compiled a list of some real estate terms that every buyer and future homeowner should know.
A down payment is the amount of money a buyer pays upfront when purchasing a home. While the down payment percentage depends on the price of the home, it typically falls between 5% and 20%. For example, a 20% down payment on a $ 500 000 home will result in $ 100 000 paid to finalize the transaction and $ 400 000 in mortgage total. Any down payment lower than 20% will require Mortgage Default Insurance.
Mortgage Default Insurance
This insurance is required by lenders as it protects them in case the buyer ever defaults on their mortgage, meaning if they stop making payments or breach any other contractual obligations with the lender.
In the context of real estate, the amortization schedule is what lenders use to determine the period of time that the entire mortgage will be repaid and as a result the amount that will be paid on a monthly basis. Most often, the Amortization is 25 or 30 years. In simple terms, a buyer wouldn’t be expected to pay off an entire mortgage in 5 or 10 years as those payments would be astronomical and not manageable for most people.
Because Mortgages are such significant amounts of money, lenders will break up the contractual obligations into “Terms”. These can range from as little as 6 months to as long as 5 years. The idea is that the buyer and lender agree to certain terms for that period of time, and renegotiate based on the market conditions at the end of each term.
Fixed/Variable Mortgage Interest Rate
A fixed mortgage interest rate is a mortgage interest rate that remains constant, for the length of the term, the buyer will pay the same amount in interest and principal. It will be locked in at the market rate at the start of the term. A variable mortgage interest rate means that while the payment will remain constant, the ratio of interest:principal will vary depending on the market rate.
The costs and expenses that occur to complete the purchase of a home are known as closing costs. The closing costs percentage typically falls between 1% and 5%. Examples are: Land transfer tax and legal fees.
A conditional offer is an offer subject to specified conditions, usually with an agreed time limit – in other words, an offer is only valid if the conditions are met by their deadlines, or an extension is agreed upon by both parties.
After making an offer for a home, the seller may choose to negotiate more favourable terms for them, they will return that offer and give the buyer the opportunity to accept their changes or allowing the buyer to make more changes until either both parties agree and a deal is reached or neither party can agree, in which case the deal will become null and void.
Every homeowner should learn as much as possible about real estate terms and their meanings. The more comfortable you are with real estate terminology, the more straight forward the buying process is. Before you get your hands full with the process of purchasing a home, set some time aside to learn the commonly used terms. It’ll be worth it in the long run!